". . . for almost a century the basic principles on which this civilization was built have been falling into increasing disregard and oblivion." -- Hayek

Tuesday, June 13, 2006

The Fuller Court & Economic Prosperity

Mancur Olson suggests there are 2 necessary conditions for economic prosperity: (1) strong protection of property rights, including enforcement of contracts, and (2) minimum economic predation or rent seeking. I've posted on Olson's necessary conditions before, e.g., here and here. I'm interested in looking at the Supreme Court's opinions from the perspective of theses necessary conditions for economic prosperity. I think the so-called Lochner era of Court constitutional jurisprudence got many opinions correct from the point of view of economic prosperity, and that means the Lochner opinion is one of my favorites.

It was the Fuller Court (1888-1910) that decided Lochner in 1905. Today, many in the judiciary, as well as many in the law schools, see Lochner as a foolish mistake. Many even assert that not only the Lochner opinion, but more generally the Fuller Court’s general jurisprudence regarding regulation of the economy was either a radical departure from earlier Court jurisprudence or was primarily an effort by the Court to protect the interests of the business community.

James W. Ely, Jr., explains in The Fuller Court that neither of these negatives views of the Fuller Court make sense. Most importantly from my perspective, the Fuller Court was not a departure from the past, nor was it a political court seeking to protect a specific segment of our system of political economy:

Fuller and his colleagues built upon a constitutional tradition that assigned a high value to property rights, private economic ordering, and limited government. Recall that protection of property rights had been a central concern of the Court under Chief Justice John Marshal (1801-1835). Closer to Fuller’s era, the Supreme Court under Chief Justice Morrison R. Waite . . . also manifested its willingness to uphold the rights of property owners. . . .

The Fuller Court, therefore, represented not a sharp break with the past but a flowering of time-honored themes of constitutionalism. . . .

An essential element of Fuller Court jurisprudence as the traditional Anglo-American premise that the law should safeguard private property in the name of liberty. For Fuller and his colleagues property and liberty were inseparable, and both were closely related to freedom of contract and private economic ordering. Like most Americans of the age, the justices of the Fuller Court tended to define liberty primarily in economic terms. . . .The Fuller Court championed private property and contractual freedom in order to limit the reach of government and thereby protect liberty.

The Fuller Court’s solicitude for the rights of property owners stemmed from utilitarian considerations as well as philosophical imperatives. Investment capital was vital to finance economic development. Associating the security of private property with industrial growth, Fuller and his colleagues persistently sought to protect capital formation. . . . (189-190)

I think it is important to note that the Fuller Court’s jurisprudence, as described by Ely, fits very well with Olson’s necessary conditions for economic prosperity. Specifically, the Fuller Court’s jurisprudence emphasized the protection of economic liberty by safeguarding property rights and enforcing the freedom to contract. Further, it seems that a reason for such commitments to property and contracts was an interest in securing the types of property rights that would encourage saving and investment, and the development of the capital markets that would allow people to look to the future. In addition, because the Fuller Court represented a “flowering of time-honored themes of constitutionalism,” one reads in Ely’s book an indication that the Constitution, as well the opinions of the Supreme Court, was consistent with the institutional framework for a system of political economy that would promote and encourage the economic choices of people that allow the development and enjoyment of economic prosperity over time.

But, there was also an interesting tension in the Fuller Court’s opinions between the protection of property rights and a commitment to federalism also found in the Constitution.

. . .Consistent with its dedication to a limited federal government, the Court was anxious to preserve the traditional distribution of power between the national and state government. Consequently, Fuller and his colleagues tended to defer to state governance of criminal justice, race relations, and public morals. This belief in federalism also led the justices to reject an expansive application of the Bill of Rights to the states.

. . . .Not only were most state business regulations upheld, but the justices hoped to maintain a balance between federal and state authority over the economy. . .

. . . . In the late nineteenth century state legislatures, acting under their police power to advance public health, safety, and morals, took the initiative in seeking to harness the new economic forces transforming America. Such exercises of state authority often impinged the prerogatives of property owners and employers, stimulating a stream of legal challenges. (190-191)

It seems to me that while the Fuller Court protected economic liberty well against the United States Congress, it did not do well in general with respect to state legislatures, and this is really the tension Ely notes. Perhaps this tension between what appears competing values might seem a “natural” tension found in the Constitution itself, but I think the tension may result from a definition of police power that was not consistent with government’s role as the protective state. The quotes above from Ely’s discussion point to where I think the problem can be found, i.e., in defining police power so broadly as to include public morals as well as public health as involving issues that are really private rather than public.

Many issues can and should be left to state legislatures, and this is surely the point of principles of federalism for the organization and structure of government in our system of political economy. Saying this does not preclude the Court constraining state legislative power when economic liberties are threatened by state legislatures. Police power should be defined primarily from the perspective of individual liberty by saying that such state government power involves using force and coercion to reduce or minimize the actions of some that harm the person or property of others. I do not see “public morals” as fitting within this definition. I suggest there are only private or individual morals. The term “public morals” has been used largely in ways that amounts to some in the community trying to enforce their own view of moral behavior on others in the community. The term “public health” has been used in similar ways, not just when the policy issue involves risks to life and health from communicable diseases.

My sense is that while the Fuller Court was quite good with respect to Congress in constraining the national legislature’s efforts to infringe property rights, and in constraining the national legislature’s efforts to embrace rent seeking legislation, it’s federalism encouraged state legislatures to infringe property rights and contracts, and it encouraged states to engage in rent seeking legislation. Some may argue that this is indeed the constitutional structure for state versus national governments in our system of political economy, I suggest a more sound and consistent definition of the police power reserved for state governments would have strengthened the institutional foundations for economic prosperity.